Should you offer transactional or experiential rewards in your loyalty program?
When it comes to customer loyalty programs, the reliance on transactional rewards has been pervasive.
97% of loyalty programs only rely on transaction-based incentives (according to a Capgemini’s study).
But what should raise your concern is that 77% of these transactional programs fail within the first two years.
This should prompt businesses to explore alternative strategies to foster lasting customer loyalty.
Transactional rewards are great.
But they need to be mixed with experiential rewards.
The difference between transactional and experiential rewards
Transactional rewards revolve around tangible, transaction-based benefits like discounts, cashbacks, or points earned through purchases.
These rewards are primarily aimed at incentivizing customers based on their monetary transactions.
Experiential rewards emphasize creating immersive and memorable experiences for customers.
They focus on emotional connections, personalized interactions, and unique opportunities that go beyond mere transactional aspects.
Now that we can see the difference, let's explain the ins and outs of each of these reward types more closely.
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Transactional rewards
As we saw in the article’s intro, transactional rewards are the backbone of many customer loyalty programs.
And you’re probably already well acquainted with this kind of reward!
Transactional rewards provide customers with tangible benefits directly tied to their purchasing activities.
They often take the form of:
Discounts and Coupons: Customers receive exclusive discounts or coupons that can be redeemed during future purchases.
Points Programs: Customers earn points based on the amount they spend or the frequency of their purchases. These points can later be redeemed for discounts, free products, or other incentives.
Cashbacks and Rebates: Customers receive a percentage of their purchase amount back as cash or store credit. For example, an online retailer might offer a 5% cashback on all purchases made during a specific promotional period.
The pros of Transactional Rewards
Immediate Incentives
Transactional rewards provide customers with instant gratification through tangible benefits such as discounts, coupons, and points.
This immediate reward system creates a sense of excitement and satisfaction.
It encourages customers to make repeat purchases and solidify their loyalty.
Tangible Value
Transactional rewards allow customers to directly assess the value they are gaining,
Knowing the precise benefits they receive based on their transactions makes them perceive the program as transparent and fair.
This transparency instills trust and confidence in customers.
It makes them more likely to engage with the loyalty program and to continue using it.
Easy Implementation
Implementing transactional rewards is relatively straightforward, which makes them accessible for every brand, whatever their size or industry.
Loyalty platforms can automate the process of tracking and managing transactional rewards.
They help optimize operations and ensure a seamless customer experience.
The simplicity of implementation also allows companies to launch their loyalty programs quickly.
This means they can start reaping the benefits soon, without the need for extensive configuration or infrastructure.
Customer Acquisition
Transactional rewards are also an effective tool for attracting new customers.
Companies can attract the attention of potential customers motivated by the prospect of immediate savings or great and immediate rewards.
Transactional rewards provide a strong incentive for customers to try a brand's products or services.
This increases the chances of acquiring new customers who can then develop long-term loyalty.
The Cons of Transactional Rewards
Short-Term Focus
Transactional rewards incentivize immediate transactions and so tend to prioritize short-term gains.
While this can lead to a temporary boost in sales, it may not foster long-term loyalty beyond the transactional benefits.
Customers who primarily engage with a loyalty program solely for the transactional rewards may switch their allegiance to a competitor offering better deals, discounts, or promotions.
This short-term focus can limit the longevity of loyalty, and lead to customer churn in search of the best immediate rewards.
Lack of Emotional Connection
Transactional rewards often lack the emotional depth required to establish a profound connection between customers and brands.
Loyalty programs that solely rely on transactional rewards risk becoming impersonal and transaction-oriented
They don’t create memorable experiences and don’t forge meaningful relationships with their customers.
These latter are more likely to develop a lasting loyalty when they feel a deep emotional connection with a brand that goes beyond transactional benefits.
Limited Differentiation
In highly competitive markets, transactional rewards alone may not be enough to differentiate a brand from its competitors.
Customers may perceive loyalty programs offering similar transactional benefits as interchangeable.
This makes it difficult to stand out from the crowd and retain customers.
Discount Dependency
Over-reliance on discounts and coupons as transactional rewards can condition customers to expect constant deals.
This dependency may erode profit margins, devalue the brand over time, and potentially attract deal-seeking customers rather than loyal ones.
Businesses may face challenges when it comes to moving customers away from the constant expectation of discounts, as customers may be less willing to engage with the brand at full price.
Moreover, if competitors offer better discounts or promotions, customers may quickly switch loyalties.
This emphasizes the importance of diversifying rewards beyond just transactional incentives.
Experiential rewards
Experiential rewards take customer loyalty programs to a new level. They focus on creating meaningful and personalized experiences for customers.
Unlike transactional rewards, which are tied solely to monetary transactions, experiential rewards aim to forge emotional connections, enhance the overall customer experience and foster a sense of loyalty.
Experiential rewards cover a wide range of offerings, such as:
Exclusive Events and VIP Access: Customers are granted access to exclusive events, such as product launches, private sales, or behind-the-scenes tours.
Personalized Services: Customers receive personalized services tailored to their preferences and needs. This can include personalized recommendations, dedicated customer support, or custom-made products.
Surprise and Delight: Random acts of surprise and delight create memorable moments for customers. Brands may send unexpected gifts, handwritten notes, or customized surprises to express appreciation for their loyalty.
Gamification and Challenges: Brands incorporate gamified elements into their loyalty programs to engage customers and create an element of fun. By completing challenges, customers earn rewards or unlock exclusive benefits.
Read this article to discover 11 reward ideas for your VIP customers
The Pros of Experiential Rewards
Emotional Connection
Experiential rewards focus on creating emotional connections with customers.
With personalized experiences and exclusive opportunities, brands can evoke positive emotions, strengthen customer loyalty, and establish a lasting bond.
These emotional connections go beyond transactional interactions and enhance the overall brand perception and customer satisfaction.
Differentiation and Brand Image
Experiential rewards enable brands to differentiate themselves in competitive markets and create a distinctive brand image.
Customers are more likely to remain loyal to a brand that consistently provides exceptional and personalized experiences.
This often leads to increased brand awareness and word-of-mouth promotion.
Long-Term Loyalty
As we said, experiential rewards have the potential to foster long-term loyalty.
By going beyond transactional benefits and focusing on creating meaningful interactions, brands can develop a loyal customer base that remains engaged and committed.
Customers who have had positive experiential rewards are more likely to continue their relationship with the brand.
And this will increase the overall customer lifetime value. Your bottom line will thank you.
Brand Advocacy
Experiential rewards have the power to turn customers into brand advocates.
When customers have exceptional experiences, they are more inclined to share their positive encounters with others, both online and offline.
This word-of-mouth promotion can significantly impact brand reputation and visibility, attract new customers, and contribute to organic growth.
The Cons of Experiential Rewards
Higher Costs and Resource Allocation
Implementing experiential rewards can be more resource-intensive and costly compared to transactional rewards.
Providing personalized experiences, organizing events, or offering exclusive access requires additional investment in terms of time, money and human resources.
Businesses need to carefully consider the financial implications and ensure that the return on investment justifies the expenses.
Limited Scalability
Experiential rewards may face scalability challenges, especially for businesses with a large customer base.
Delivering personalized experiences to a significant number of customers can be logistically complex.
This may require innovative solutions or strategic partnerships to ensure scalability without compromising the quality of the experiences.
Subjectivity and Individual Preferences
Experiential rewards rely on catering to individual preferences, which can be subjective and varied.
What may be a memorable experience for one customer may not resonate with another.
Brands need to carefully understand their customers' preferences and invest in diverse experiential offerings to cater to a wide range of tastes and interests.
Measurement and ROI
Evaluating the return on investment (ROI) and measuring the impact of experiential rewards can be more challenging compared to transactional rewards, which have more easily quantifiable metrics.
Determining the success of experiential rewards often requires a combination of qualitative feedback, customer sentiment analysis, and long-term tracking of customer behavior and loyalty.
Should You Use Transactional or Experiential Rewards in your Loyalty Program ?
As you might expect, we recommend you to incorporate both transactional and experiential rewards in your loyalty program.
Indeed, it is essential to diversify your rewards and offerings to ensure the long-term success of your program.
This is due to the Law of Diminishing Marginal Utility, which suggests that as the consumption or use of a good or service increases, the satisfaction derived from each subsequent use diminishes.
So by leveraging both types of rewards, brands can offer customers a comprehensive rewards catalog that prevents customer boredom and sets them apart from their competitors.
The North Face does it very well in its loyalty program for example :
Transactional rewards are ideally suited for automation and should be used to reward every customer.
They can be easily implemented and managed through loyalty platforms.
Transactional rewards can foster engagement, incentivize repeat purchases, and create a sense of immediate gratification.
On the other hand, experiential rewards require manual processes and are best suited for rewarding top customers.
Tiered programs, which are based on the concept of status and luxury, are particularly suitable for this kind of reward.
By offering exceptional experiences exclusively to customers in higher tiers, brands elevate their value and reinforce the sense of special status and elevated treatment.
These rewards go beyond transactions and create memorable moments that deepen the emotional connection and foster long-term loyalty.
Read this article to find out more about tiered programs.
Striking the right balance between transactional and experiential rewards allows brands to create an automated rewards strategy while still delivering personalized experiences that set them apart.
Transactional rewards provide widespread benefits, appealing to all customers, while experiential rewards add an element of exclusivity and luxury to reward top-tier customers.
